Why Traders Lose Money
“If you don’t know who you are, the stock market is a very expensive place to find out,” wrote George Goodman, one of Wall Street’s pioneering financial journalists who became known for his ability to translate economic language so that it was understandable to people. He was under the pseudonym, Adam Smith.
When we all start, we ask ourselves the same question, why do I lose money in trading? After losing money, some rookie traders start reading trading books, attending seminars, and reading blogs and forums, as if their lack of knowledge was the sole reason for their failure.
In this article, we’re going to delve deep into the financial market, trading, and open your eyes to the major obstacles that prevent traders from being successful in the markets.
THE FINANCIAL MARKET AND TRADING
Every year, online trading attracts thousands of people willing to earn money in the financial markets. What are they looking for? The answer is simple: To make money. And although the answer is simple, its execution is complex since it requires a lot to become a winning trader.
The financial market is more than just a market. It can be a physical or virtual place (stock market, bond market, forex market, derivatives market, etc.). Here, you can trade financial securities, financial assets, or investment vehicles, including stocks and bonds, raw materials, and precious metals (commodities).
Trading involves buying and selling these financial assets at low transactional coats, to generate profits. Trading is associated with the short term and investment in the long term, trading is speculative. Trading can be applied to different time frames: from minutes, hours, days, or even months.
Each trader specializes in a specific time frame and within a particular market since you can trade currencies, stocks, commodities, futures, etc.
WHY DO I LOSE MONEY?
These are two of the most popular statistics in the world of trading. While the numbers vary from study to study, the fact is that many people who start trading end up losing all or much of their capital within a few months.
In the book “Trading for a Living,” Alexander Elder opens with a solid positive statement:
“You can be free. You can live anywhere in the world. You can break free from the routine and not have to be accountable to anyone. ”
This phrase is an incentive to continue reading, and especially to resume trading, but then he says something else that probably goes unnoticed:
“Traders lose money because the game is difficult, or out of ignorance or lack of discipline.”
The second sentence explains the philosophy behind poor trading: difficulty, ignorance, and lack of discipline. But that’s not all; losing money in the market is way deeper than these.
Markets are tough! It is always challenging to make money in trading. The markets are traps set up for less-prepared investors to leave their money at the disposal of predators. You could say that the markets are difficult if you don’t understand them.
Experts in the financial markets recognize, in fact, that approximately nine out of ten new investors lose money in their early days because they do not identify such basic keys as knowing that the trend is always their friend and, hence, the importance of following clear rules when trading in the markets.
The general belief that we can make money fast in the market does not exist. A large percentage of traders lose money. We invest only thinking about winning, and in the financial market, we must know that we can also fail. It is essential to observe and follow the movements that the market makes instead of following trends, which are riskier.
Most traders, regardless of their skill and experience, will still make losses. It doesn’t matter if the trader is knowledgeable about approaching certain market conditions; it is inevitable to avoid losses over the long run. Let’s explore the reasons why:
The most successful traders in the industry are those who research, develop and stick to a strategy that works without letting the herd push and pull them from one point to another. A lot of traders today are like leaves that blow in the direction of the wind. They practice a strategy, and at the slightest trend, they abandon ship and move with the crowd. When the group loses, you lose with them, and the circle goes on and on.
Yes, many traders try their best to stick to a working plan, but as a human, your best efforts could be futile when the crowd counts. You turn to your right, and your friends and the media buzz about how great a particular asset is doing; you turn to your left, and all you can hear is how bad an asset is doing. With all the noise, it can be difficult to take a contrarian view.
You struggle with voices in your head. Deep down, you want to stay put, but if it turns out that you’re wrong, you fear that everyone could make fun of you. No one wants to feel regret; no one wants to be that person that lost out when others were making profits; you don’t care if it’s temporary; you just don’t want to be left behind when the crowd is cashing out.
There is a price to pay for not joining the crowd. You can’t talk confidently about trades because no one believes you know what you’re doing. You are seen as ignorant. If you hold a contrary position to the crowd and you end up being right, don’t be surprised if everyone sees you as “enemy number one.” Why?… Well, you made money while others lost! Sounds ridiculous, but it’s true. Remember Occupy Wall Street (OWS)? Or the backlash that hedge fund traders received after making billions when they took advantage of the housing market collapse? What about the resentment for that manager who keeps his job while other staff gets laid off?
When you win in the market while the majority lose, don’t expect anyone to sing your praises. You could be crucified. It’s not your fault, it’s just the way humans are. People prefer like-minded companies, so during major market turns, the very few who make a profit are seen as the enemy.
It’s easy to get discouraged from standing firm on what you believe. Sometimes, you’re thinking, “I can follow them now and get out early enough.” Trust me, it’s not as easy as it sounds in your head. Everyone in the crowd is probably thinking the same thing. Crowds move together, so when you join them, you feel part of one body. It’s always difficult to break out.
If you’re serious about avoiding losses, then you must stick to a well-defined plan in rain and sunshine. Follow your plan even when things don’t seem comfortable. Unfortunately, a lot of traders give up too easily under pressure and move with the crowd.
You must have an excellent strategy and be disciplined. Combined, these two can be the key to success in the market, even when most people are losing. The most successful traders never move with the crowd; rather, they stick to a great plan and adhere to their concepts.
As an active trader, strive to be an independent thinker. This involves doing thorough research, studying patterns, studying charts to see how the prices react in certain circumstances, among others. You can either learn or develop your own effective strategy. It is impossible to be right always, but ensure that you learn from your mistakes and improve on your strategy.
Sometimes your research and strategies can align you with the crowd, and sometimes you could be on the other side of the divide. What matters is that you are doing your own thing. Your decisions are based on your research, available statistics, and the strategies that you trust.
Buying frenzies are typical in the market and can be a dangerous pull that leads to major losses. Some traders make speculative purchases on rising stocks with the belief that more people will buy after them, thereby causing the price to rise, which allows them to sell at a profit.
Prices only move up when there are more buyers than there are sellers. So as a trader, regardless of the in-depth analysis and forecasts in your head, you are gambling on people’s behavior in the market. As more and more people continue to push the price up, new investors must be willing to pay higher prices. Eventually, a time will come when no one will be willing to pay higher or when more people are selling than buying.
Once there are no more people willing to buy, those who bought earlier in the trend start to pull out, and those who got involved late begin to panic, causing the price to crash. Thus, those who got involved late (who are usually the majority) are left with significant losses.
Let’s take a look at Bitcoin, for instance. The spike in this cryptocurrency lured several people worldwide to invest in what was seen as a new technology that would change the world. By the middle of 2017, more people wanted to know about this “new gold.”
By late 2017 and early 2018, Bitcoin had peaked at $20,000. The media was talking about it; people all over the world were raving about it. Many people who had never even heard about it before wanted to jump right in because it was a market trend.
By the first week of February 2018, Bitcoin crashed to $7000. It took three years before Bitcoin came close to $20,000 again. Now, the significant thing here is that a lot of people went into the market without researching, without any good investment plan, some with a short-term investment mentality, all because they allowed themselves to get pulled into a buying frenzy. It is typical for traders to get involved in market trends near turning points, and this is where the biggest losses are recorded.
Although Bitcoin has peaked to a record high, there is no doubt that thousands of people were lured in when the price was high and ended up selling at a much lower price.
As a trader, you must know that times will come when assets get hot, and buying frenzies will begin. At this point, there will be outstretched hands to welcome you. Only savvy investors make a profit from buying frenzies, while the masses who pushed the frenzy experience losses.
Lack of discipline – Not having an effective strategy
Professionals are, above all, disciplined. They learn to know the disadvantages and the advantages that the market offers them. They repeat their strategies over and over again. Trading for them has ceased to have emotion; it is just a mechanical act, one more job.
Hardly will a successful trader get fazed by losing money. They know that in the market, losses are inevitable, but the goal is to minimize it to the barest minimum. They have reached the point where losing or winning has no emotion; the important thing is to do it well and follow a well-defined plan. They know that if they do, the law of large numbers will favor them in the long run.
Traders who lack discipline tend to follow a different strategy every day, looking for the magic indicator for the perfect entries. Something that the professional trader knows does not exist.
The problem is that jumping from one system to another, from one indicator to another, from one guru to another, can burn a deep hole in your pocket. By the time you realize that you’re sinking, it might be too late to recover.
To be a successful trader, you must be disciplined. You must research, study the market and follow an effective strategy with discipline. Your strategy is your manual to maneuver obstacles in the market and to know how to react in different situations. Don’t ask yourself, “What will the markets do?”, ask yourself, “What will I do?” If you are disciplined, if you have an effective trading strategy covering all possible contingencies, you will know what to do.
Not being flexible to market changes
Having a trading strategy and being disciplined in its use is a great way to succeed in the market. However, your strategy must be flexible. It is necessary to observe the market behavior and digest relevant data to make the best market decisions. Your strategy cannot be rigid; rather, it should be able to adapt to different market conditions.
Think of it as a soccer game. As a coach, you have a philosophy (playing style), but your philosophy cannot be tailored to just one game plan and one formation. You must study your different opponents in each game and develop a game plan for each opponent while maintaining your philosophy. If your philosophy is only practical with one formation and one game plan, then failure is inevitable when the opponent proves difficult to beat or springs up surprises.
When we start, we all think we know exactly what we are doing, but the reality is that the market comes with different surprises. To avoid losses in the market, you must manage your capital adequately based on research and an effective trading strategy.
Many traders approach the market blindly because they have been made to believe that making a profit involves just doing the basics. Knowing the markets can be complicated, difficult, and is impossible to master completely. However, it is possible to minimize losses with an effective plan.
Several trading systems exist, but the key is to seek knowledge from more experienced traders while also doing research, studying statistics, and knowing the peculiarity of the market. With time you can learn an effective strategy, develop yours, and further modify existing strategies to adapt them to your style.
Following a style that doesn’t suit you
Finding a trading style that suits our personality and lifestyle is an important factor in being successful in trading in the markets. Many traders choose a strategy randomly without first checking to see if trading that way suits them.
For example, if you’re someone with very little time available daily to trade, it won’t be easy to make money doing intraday trading. Perhaps a trading style that doesn’t involve spending several hours on the charts would be better for you.
For the same reason, some traders fail to achieve good results by following the strategy of other traders and applying it without adaptations.
Some people often try to sell the idea that by applying “X person’s” strategy or signals, you will become a profitable trader. The reality is not so simple. There are no recipes for direct application: you have to know where your advantages and disadvantages lie in the market, know your most effective tools, and operate in a way that suits you, based on your experience and knowledge.
Patience is an underestimated skill as a trader. This refers to your ability to accept or tolerate delays, issues, or unforeseen circumstances, without becoming anxious.
Trading is an activity that requires large doses of this virtue since the study and planning periods are very long compared to the periods in which orders and operations are executed.
Patience is necessary for many moments:
- Patience while you wait to open a trade.
- Patience when you are in the market and manage your position.
- Patience while growing your trading account.
- Patience to continue learning and improving your strategy.
Lack of patience can cause many traders to make mistakes regularly, both in the short-term when trading and in the long-term in the way they develop a career as traders.
Very large position size
Using huge position sizes is another reason why traders lose money. This usually stems from greed, and in truth, it is part of human nature. We want more, and we want it fast, but the market doesn’t care.
Large position sizes can lead to more significant losses that are more difficult to recover. Furthermore, they not only cause more damage to trading capital but also to emotional capital.
In addition to the above, very large positions make emotions soar, and it becomes more difficult to trade. Therefore, an appropriate percentage must be used in each operation that involves a small part of the available capital; one that should be set in advance in our trading plan.
Neglecting the use of risk management techniques
One of the most popular risk management techniques is the Stoploss Order. Stoploss orders should be used in most strategies as they only offer advantages. They mainly keep our losses controlled at previously set levels, allowing us to establish the size of our operations and our risk/benefit ratio. They also eliminate large losses from a trading strategy, turning a losing strategy into a winning one.
Some people criticize their use, arguing that these orders often cause them to exit trades that later move in the right direction. The problem may be due, rather than the use of stop losses, to the fact that orders are usually placed in very obvious places or without taking into account the volatility of the market.
Lack of emotional control
Controlling your emotions while trading is one of the most difficult skills to master. For example, among the strongest emotions that affect a trader is “Fear,” and it can lead us to make common mistakes such as:
- Taking trades outside of our trading plan, simply for fear of being left out of a market movement and not making a potential profit.
- Closing a trade with a small profit for fear of losing what you have won.
The problem is that emotions are part of human nature. Therefore, it would be impossible for a trader to operate like a robot. However, it is important to be in control. learn more